Why Nest might need another huge funding round

Smart home startup Nest has been using design to reinvent unloved products like the hated smoke detector and neglected thermostat. It’s no small feat and turns out it needs a lot of funding to do so, including scaling a consumer electronics business, launching in new sectors and fighting off the unhappy incumbents.

Just a year and a half after raising around $80 million, Nest Labs is reportedly working on closing some $150 million in funding (or as high as $200 million) led by Yuri Milner’s investment firm DST, according to Re/code. The valuation of the round could be between $2 billion and $3 billion, which would mean that Nest’s valuation has about tripled from the $800 million valuation I heard for the company’s last round.

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If this reported round closes, Nest could have raised between $230 million and $280 million from just these last two rounds, with a possible another $50 million to $80 million raised before launch. I know it raised at least “tens of millions” before it launched. Nest doesn’t comment on funding so it’s hard to tell how much it has amassed since its founding, but I would guess, with this funding, it will have at least gotten over the $300 million mark.

That’s a decent chunk of change for a company that officially launched only a little over two years ago. Re/code said other investors were vying for the deal but that Yuri Milner’s firm DST clinched it, and the round will include current investors Venrock, Google Ventures, Generation, Lightspeed, and Shasta.

Nest needs a lot of money to scale its current businesses, to launch new products, and also to fight lawsuits that have cropped up. Nest was hit with another (its second) patent lawsuit in November from BRK, which makes the First Alert smoke detector. The first was from thermostat maker Honeywell.

Part of the funding no doubt will go to scaling its current products. I’ve heard that Nest has been growing its thermostat business quite nicely. A year ago I reported that the company was shipping 40,000 to 50,000 of its learning thermostats per month. If its valuation has tripled since its last funding, its thermostat business has done well.

But when it comes to the Protect smoke detector product, it’s unclear how much of a hit that device has been. The price point is rather high ($129) for a smoke detector, and the reviews have been less enthusiastic than they were for the thermostat. Nest might need to invest more heavily in actively marketing and building distribution for the smoke detector, beyond the strong word of mouth and buzz it partly relied on for the thermostat. I’ve asked Nest for more details on shipment and sales numbers for its smoke detector product, and I will include those if I learn more.

Since Nest is reinventing older products based on smart design (the thermostat and the smoke detector), the company could end up falling into a sort of hits-oriented business model. One product could be a big hit, while another doesn’t touch a nerve and make that emotional connection that they need. Nest CEO Tony Fadell spoke with Om at our recent Roadmap conference about the power of design to reinvent these older products.

Nest also will likely launch new products beyond the thermostat and the smoke detector in the future. Researching, creating, launching, marketing and scaling those new products quickly will all require more funds.

With the launch of the smoke detector, Nest seems to have moved beyond working just on green products. It’s clearly aiming to be a large consumer electronics company built in the vein of Apple but for a next-generation of connected devices. To get there — or even to compete with Apple — Nest needs to be big. And it needs funds to get there.

They need another funding round because they’ve been having to deal with the consequences of having crap products and crap customer service. I’m an HVAC technician who’s worked with the thermostat in many people’s homes, never before have I seen such a high failure rate on a thermostat. Both of their products were good ideas, but overpriced in the case of the Protect and unreliable in the case of the thermostat. I really hope that they work on this because they have everyone else beaten in terms of physical design. If they can actually get it to control equipment properly they will hands down have the best thermostat on the market.

Nest is clearly building all the parts for a home security system, bit by bit. I’d be surprised if the next product wasn’t more security featured as it’s an easy tie in with a thermostat and smoke alarm. That will have greater value for consumers as the current market is a smorgasbord of half concepts. My only selfish wish is that they’re able to incorporate my existing GE wireless sensors into a smarter basestation instead of having to buy and install all new sensors. If that’s too cahllenging in the short term, then I expect a door houselock solution with security camera installed.

yup. Nest needs loads of money because:
A great product attracts competitors, and only speed to market will keep/get Nest on top.
Volume is required, not only in USA but out there in the real world in other countries with different heating/cooling systems. Europe, China, & more. That costs.
It fancies digressing (e.g. smoke detectors which can be had for USD10) and it should stick to the knitting. And avoid more lawsuits.
While it gets v3 ready, it must invest heavily in future versions and updates. Can you update once purchased?? Oh dear!
It has to convince users that it will stay in business, if use of product depends on it. Or eliminate dependency on company for operation of kit.
Design is good, but you have to get everything else right too.
That’s why.

I really wonder who Nest is aiming at. Are there that many people with more money than sense?
Why spend 10x the cost of a normal smoke detector so it can talk to you. Fires thankfully are rare but in the case of one you need to be warned in a serious way, like a big noise.
Also at $100 your not going to buy 4 or 5 at a time. You really need one in just about every room. Save your life and your family not waste money on some device just because it has a fancy case. Get real people…..

A $130 Smoke Detector shows me that the company doesn’t have a clear vision about what families need. It’d cost me $800 to outfit my rather small home and these would have to be replaced in 7 years if I want to keep the CO sensors current.

The reviews of the Protect aren’t that good and I’m sure it has a higher return rate than the thermostat based on Amazon review. There are some gotchas in the Protect that simply shouldn’t be there in such an expensive product.

I hope Nest makes a wiser decision with their new funding by creating products that have more impact for the typical family.

@snuggles, it’s the nature of reporting on a company that doesn’t discuss or confirm funding or shipments. The “I heard” about the $800M valuation from Jan 2013 was from multiple sources. If you have any fact-based documents you want to share with me, please do, katie@gigaom.com